Euro

The Last, Great Run For The U.S. Dollar, The Death Of The Euro And 74 Trillion In Currency Derivatives At Risk

March 10, 2015March 10, 2015 by Michael

Are we on the verge of an unprecedented global currency crisis? On Tuesday, the euro briefly fell below $1.07 for the first time in almost a dozen years. And the U.S. dollar continues to surge against almost every other major global currency. The U.S. dollar index has now risen an astounding 23 percent in just the last eight months. That is the fastest pace that the U.S. dollar has risen since 1981. You might be tempted to think that a stronger U.S. dollar is good news, but it isn’t. A strong U.S. dollar hurts U.S. exports, thus harming our economy. In addition, a weak U.S. dollar has fueled tremendous expansion in emerging markets around the planet over the past decade or so. When the dollar becomes a lot stronger, it becomes much more difficult for those countries to borrow more money and repay old debts. In other words, the emerging market “boom” is about to become a bust. Not only that, it is important to keep in mind that global financial institutions bet a tremendous amount of money on currency movements. According to the Bank for International Settlements, 74 trillion dollars in derivatives are tied to the value of the U.S. dollar, the value of the euro and the value of other global currencies. When currency rates start flying around all over the place, you can rest assured that someone out there is losing an enormous amount of money. If this derivatives bubble ends up imploding, there won’t be enough money in the entire world to bail everyone out.

Do you remember what happened the last time the U.S. dollar went on a great run like this?

As you can see from the chart below, it was in mid-2008, and what followed was the worst financial crisis since the Great Depression…

A rapidly rising U.S. dollar is extremely deflationary for the overall global economy.

This is a huge red flag, and yet hardly anyone is talking about it.

Meanwhile, the euro continues to spiral into oblivion…

How many times have I said it? The euro is heading to all-time lows. It is going to go to parity with the U.S. dollar, and then it is eventually going to go below parity.

This is going to cause massive headaches in the financial world.

The Europeans are attempting to cure their economic problems by creating tremendous amounts of new money. It is the European version of quantitative easing, but it is having some very nasty side effects.

The markets are starting to realize that if the value of the U.S. dollar continues to surge, it is ultimately going to be very bad for stocks. In fact, the strength of the U.S. dollar is being cited as the primary reason for the Dow’s 332 point decline on Tuesday…

The Dow Jones industrial average fell more than 300 points to below the index’s 50-day moving average, wiping out gains for the year. The S&P 500 also closed in the red for the year and breached its 50-day moving average, which is an indicator of the market trend. Only the Nasdaq held onto gains of 2.61 percent for the year.

There’s “concern that energy and the strength in the dollar will somehow be negative for the equities,” said Art Hogan, chief market strategist at Wunderlich Securities. He noted that the speed of the dollar’s surge was the greatest market driver, amid mixed economic data and concerns about the Federal Reserve raising interest rates.

And as I noted above, when the U.S. dollar rises the things that we export to other nations become more expensive and that hurts our businesses.

This is so basic that even the White House understands it…

Despite reassurance from The Fed that a strengthening dollar is positive for US jobs, The White House has now issued a statement that a “strengthening USD is a headwind for US growth.”

But even more important, a surging U.S. dollar makes it more difficult for emerging markets all over the world to borrow new money and to repay old debts. This is especially true for nations that heavily rely on exporting commodities…

It becomes especially ugly for emerging market economies that produce commodities. Many emerging market countries rely on their natural resources for growth and haven’t yet developed more advanced industries. As the products of their principal industries decline in value, foreign investors remove available credit while their currency is declining against the U.S. dollar. They don’t just find it difficult to pay their debt – it is impossible.

It has been estimated that emerging markets have borrowed more than 3 trillion dollars since the last financial crisis.

But now the process that created the emerging markets “boom” is starting to go into reverse.

The global economy is fueled by cheap dollars. So if the U.S. dollar continues to rise, that is not going to be good news for anyone.

And of course the biggest potential threat of all is the 74 trillion dollar currency derivatives bubble which could end up bursting at any time.

The sophisticated computer algorithms that financial institutions use to trade currency derivatives are ultimately based on human assumptions. When currencies move very little and the waters are calm in global financial markets, those algorithms tend to work really, really well.

But when the unexpected happens, some of the largest financial firms in the world can implode seemingly overnight.

Just remember what happened to Lehman Brothers back in 2008. Unexpected events can cripple financial giants in just a matter of hours.

Today, there are five U.S. banks that each have more than 40 trillion dollars of total exposure to derivatives of all types. Those five banks are JPMorgan Chase, Bank of America, Goldman Sachs, Citibank and Morgan Stanley.

By transforming Wall Street into a gigantic casino, those banks have been able to make enormous amounts of money.

But they are constantly performing a high wire act. One of these days, their reckless gambling is going to come back to haunt them, and the entire global financial system is going to be severely harmed as a result.

As I have said so many times before, derivatives are going to be at the heart of the next great global financial crisis.

And thanks to the wild movement of global currencies in recent months, there are now more than 74 trillion dollars in currency derivatives at risk.

Anyone that cannot see trouble on the horizon at this point is being willingly blind.

A Day Of Reckoning For The Euro Has Arrived – 26 TRILLION In Currency Derivatives At Risk

February 8, 2015February 8, 2015 by Michael

This is the month when the future of the eurozone will be decided. This week, Greek leaders will meet with European officials to discuss what comes next for Greece. The new prime minister of Greece, Alexis Tsipras, has already stated that he will not accept an extension of the current bailout. Officials from other eurozone countries have already said that they expect Greece to fully honor the terms of the current agreement. So basically we are watching a giant game of financial “chicken” play out over in Europe, and a showdown is looming. Adding to the drama is the fact that the Greek government is rapidly running out of money. According to the Wall Street Journal, Greece is “on course to run out of money within weeks if it doesn’t gain access to additional funds, effectively daring Germany and its other European creditors to let it fail and stumble out of the euro.” We have witnessed other moments of crisis for Greece before, but things are very different this time because the new Greek government is being run by radical leftists that based their entire campaign on ending the austerity that has been imposed on Greece by the rest of Europe. If they buckle under the demands of the European financial lords, their credibility will be gone and Syriza will essentially be finished in Greek politics. But if they don’t compromise, Greece could be forced to leave the eurozone and we could potentially be facing the equivalent of “financial armageddon” in Europe. If nobody flinches, the eurozone will fall to pieces, the euro will collapse and trillions upon trillions of dollars in derivatives will be in jeopardy.

According to the Bank for International Settlements, 26.45 trillion dollars in currency derivatives are directly tied to the value of the euro.

Let that number sink in for a moment.

To give you some perspective, keep in mind that the U.S. government spends a total of less than 4 trillion dollars a year.

The entire U.S. national debt is just a bit above 18 trillion dollars.

So 26 trillion dollars is an amount of money that is almost unimaginable. And of course those are just the derivatives that are directly tied to the euro. Overall, the total global derivatives bubble is more than 700 trillion dollars in size.

Over the past couple of decades, the global financial system has been transformed into the biggest casino in the history of the planet. And when things are stable, the computer algorithms used by the big banks work quite well and they make enormous amounts of money. But when unexpected things happen and markets go haywire, the financial institutions that gamble on derivatives can lose massive quantities of money very rapidly. We saw this in 2008, and we could be on the verge of seeing this happen again.

If no agreement can be reached and Greece does leave the eurozone, the euro is going to fall off a cliff.

When that happens, someone out there is going to lose an extraordinary amount of money.

And just like in 2008, when the big financial institutions start to fail that will plunge the entire planet into another major financial crisis.

So at the moment, it is absolutely imperative that Greece and the rest of the eurozone find some common ground.

Unfortunately, that may not happen. The new prime minister of Greece certainly does not sound like he is in a compromising mood…

Greece’s new leftist prime minister, Alexis Tsipras, said on Sunday he would not accept an extension to Greece’s current bailout, setting up a clash with EU leaders – who want him to do just that – at a summit on Thursday.

Tsipras also pledged his government would heal the “wounds” of austerity, sticking to campaign pledges of giving free food and electricity to those who had suffered, and reinstating civil servants who had been fired as part of bailout austerity conditions.

Prior to the summit on Thursday, eurozone finance ministers are going to get together on Wednesday to discuss what they should do. If these two meetings don’t go well this week, we could be looking at big trouble right around the corner. In fact, Greece is being warned that they only have until February 16th to apply for an extension of the current bailout…

Euro zone finance ministers will discuss how to proceed with financial support for Athens at a special session next Wednesday ahead of the first summit of EU leaders with the new Greek prime minister, Alexis Tsipras, the following day.

However, the chairman of the finance ministers said the following meeting of the Eurogroup on Feb. 16 would be Greece’s last chance to apply for a bailout extension because some euro zone countries would need to consult their parliaments.

“Time will become very short if they (Greece) don’t ask for an extension (by then),” said Jeroen Dijsselbloem.

The current bailout for Greece expires on Feb 28. Without it the country will not get financing or debt relief from its lenders and has little hope of financing itself in the markets.

And as I mentioned above, the Greek government is quickly running out of money.

Most analysts believe that because of the enormous stakes that one side or the other will give in at some point.

But what if that does not happen?

Personally, I believe that the eurozone is doomed in the configuration that we see it today, and that it is just a matter of time before it breaks up.

And I am far from alone. For example, just check out what former Fed chairman Alan Greenspan is saying…

Mr Greenspan, chairman of the Federal Reserve from 1987 to 2006, said: “I believe [Greece] will eventually leave. I don’t think it helps them or the rest of the eurozone – it is just a matter of time before everyone recognizes that parting is the best strategy.

“The problem is that there there is no way that I can conceive of the euro of continuing, unless and until all of the members of eurozone become politically integrated – actually even just fiscally integrated won’t do it.”

The Greeks are using all of this to their advantage. They know that if they leave it could break apart the entire monetary union. So this gives them a tremendous amount of leverage. Greek Finance Minister Yanis Varoufakis has even gone so far as to compare the eurozone to a house of cards…

“The euro is fragile, it’s like building a castle of cards, if you take out the Greek card the others will collapse.” Varoufakis said according to an Italian transcript of the interview released by RAI ahead of broadcast.

The euro zone faces a risk of fragmentation and “de-construction” unless it faces up to the fact that Greece, and not only Greece, is unable to pay back its debt under the current terms, Varoufakis said.

“I would warn anyone who is considering strategically amputating Greece from Europe because this is very dangerous,” he said. “Who will be next after us? Portugal? What will happen when Italy discovers it is impossible to remain inside the straitjacket of austerity?”

After all this time and after so many bailouts, we have finally reached a day of reckoning.

There is a very real possibility that Greece could leave the eurozone in just a matter of months, and the elite know this.

That is why they are getting prepared for that eventuality. The following is from a recent Wall Street Journal report…

The U.K. government is stepping up contingency planning to prepare for a possible Greek exit from the eurozone and the market instability such a move would create, U.K. Treasury chief George Osborne said on Sunday.

A spokeswoman for the Treasury declined comment on the details of the contingency planning.

The U.K. government has said the standoff between Greece’s new anti-austerity government and the eurozone is increasing the risks to the global and U.K. economy.

“That’s why I’m going tomorrow to the G-20 [Group of 20] to encourage our partners to resolve this crisis. It’s why we’re stepping up the contingency planning here at home,” Mr. Osborne told the BBC in an interview. “We have got to make sure we don’t, at this critical time when Britain is also facing a critical choice, add to the instability abroad with instability at home.”

And if Greece does leave, it will cause panic throughout global financial markets as everyone wonders who is next.

Italy, Spain and Portugal are all in a similar position. Every one of them could rapidly become “the next Greece”.

But of even greater concern is what a “Grexit” would do to the euro. If the euro falls below parity with the U.S. dollar, the derivatives losses are going to be absolutely mind blowing. And coupled with the collapse of the price of oil, we could be looking at some extreme financial instability in the not too distant future.

When big banks collapse, they don’t do it overnight. But we often learn about it in a single moment.

Just remember Lehman Brothers. Their problems developed over an extended period of time, but we only learned the full extent of their difficulties on one very disturbing day in 2008, and that day changed the world.

As you read this, big financial troubles are brewing in the background. At some point, they are going to come to the surface. When they do, the entire planet is going to be shocked.

11 Signs That Time Is Quickly Running Out For The Global Financial System

July 30, 2012 by Michael

Are we rapidly approaching a moment of reckoning for the global financial system? August is likely to be a relatively slow month as most of Europe is on vacation, but after that we will be moving into a “danger zone” where just about anything could happen. Historically, a financial crisis has been more likely to happen in the fall than during any other time, and this fall is shaping up to be a doozy. Much of the focus of the financial world is on whether or not the euro is going to break up, but even if the authorities in Europe are able to keep the euro together we are still facing massive problems. Countries such as Greece and Spain are already experiencing depression-like conditions, and much of the rest of the globe is sliding into recession. Unemployment has already risen to record levels in some parts of Europe, major banks all over Europe are teetering on the brink of insolvency, and the flow of credit is freezing up all over the planet. If things take a really bad turn, this crisis could become much worse than the financial crisis of 2008 very quickly.

All over the world people are starting to write about the possibility of a major economic crisis starting this fall.

For example, a recent article in the International Business Times discussed how some economists around the globe are fearing the worst for the coming months….

The consensus? The world economy has entered a final countdown with three months left, and investors should pencil in a collapse in either August or September.

Citing a theory he has been espousing since 2010 that predicts “a future lack of policy flexibility from the monetary and fiscal side,” Jim Reid, a strategist at Deutsche Bank, wrote a note Tuesday that gloated “it feels like Europe has proved us right.”

“The U.S. has the ability to disprove the universal nature of our theory,” Reid wrote, but “if this U.S. cycle is of completely average length as seen using the last 158 years of history (33 cycles), then the next recession should start by the end of August.”

The global financial system is so complex and there are so many thousands of moving parts that it is always difficult to put an exact date on anything. In fact, history is littered with economists that have ended up looking rather foolish by putting a particular date on a prediction.

But without a doubt we are starting to see storm clouds gather for this fall.

The following are 11 more signs that time is quickly running out for the global financial system….

#1 A number of very important events regarding the financial future of Europe are going to happen in the month of September. The following is from a recent Reuters article that detailed many of the key things that are currently slated to occur during that month….

In that month a German court makes a ruling that could neuter the new euro zone rescue fund, the anti-bailout Dutch vote in elections just as Greece tries to renegotiate its financial lifeline, and decisions need to be made on whether taxpayers suffer huge losses on state loans to Athens.

On top of that, the euro zone has to figure out how to help its next wobbling dominoes, Spain and Italy – or what do if one or both were to topple.

#2 Reuters is reporting that Spanish Economy Minister Luis de Guindos has suggested that Spain may need a 300 billion euro bailout.

#3 Spain continues to slide deeper into recession. The Spanish economy contracted 0.4 percent during the second quarter of 2012 after contracting 0.3 percent during the first quarter.

#4 The unemployment rate in Spain is now up to 24.6 percent.

#5 According to the Wall Street Journal, a new 30 billion euro hole has been discovered in the financial rescue plan for Greece.

#6 Morgan Stanley is projecting that the unemployment rate in Greece will exceed 25 percent in 2013.

#7 It is now being projected that the Greek economy will shrink by a total of 7 percent during 2012.

#8 German Finance Minister Wolfgang Schäuble says that the rest of Europe will not be making any more concessions for Greece.

#9 The UK economy has now plunged into a deep recession. During the second quarter of 2012 alone, the UK economy contracted by 0.7 percent.

#10 The Dallas Fed index of general business activity fell dramatically to -13.2 in July. This was a huge surprise and it is yet another indication that the U.S. economy is rapidly heading into a recession.

#11 As I have written about previously, a banking crisis is more likely to happen in the fall than at any other time during the year. The global financial system will enter a “danger zone” starting in September, and none of us need to be reminded that the crashes of 1929, 1987 and 2008 all happened during the second half of the year.

So is there any hope on the horizon?

European leaders have tried short-term solution after short-term solution and none of them have worked.

Now countries all over Europe are sliding into depression and the authorities in Europe seem to be all out of answers. The following is what one eurozone diplomat said recently….

“For two years we’ve been pumping up the life raft, taking decisions that fill it with just enough air to keep it afloat even though it has a leak,” the diplomat said. “But now the leak has got so big that we can’t pump air into the raft quickly enough to keep it afloat.”

The boat is filling up with water faster than they can bail it out.

So what is the solution?

Well, some of the top names in economics on both sides of the Atlantic are urging authorities to keep the debt bubble pumped up by printing lots and lots more money.

For example, even though the U.S. government is already running trillion dollar deficits New York Times “economist” Paul Krugman is boldly proclaiming that now is the time to print and borrow even more money. He is proud to be a Keynesian, and he says that “you should be a Keynesian, too.”

Across the pond, the International Business Editor of the Telegraph, Ambrose Evans-Pritchard, is strongly urging the ECB to print more money….

Needless to say, I will be advocating 1933 monetary stimulus à l’outrance, or trillions of asset purchases through old fashioned open-market operations through the quantity of money effect (NOT INTEREST RATE ‘CREDITISM’) to avert deflation – and continue doing so until nominal GDP is restored to its trend line, at which point the stimulus can be withdrawn again.

But is more money and more debt really the solution to anything?

In the United States, M2 recent surpassed the 10 trillion dollar mark for the first time ever. It has increased in size by more than 5 times over the past 30 years.

Unfortunately, our debt has been growing much faster than GDP has over that time period.

For example, during the second quarter of 2012 U.S. government debt grew by 274.3 billion dollars but U.S. GDP only grew by 117.6 billion dollars.

Our problem is not that there is not enough money floating around.

Our problem is that there is way, way too much debt.

But this is how things always go with fiat currencies.

There is always the temptation to print more.

That is one of the big reasons why every single fiat currency in history has eventually collapsed.

Printing more money will not solve our problems. It will just cause our problems to take a different form.

In the end, nothing that the authorities can do will be able to avert the crisis that is coming.

A lot of people are starting to realize this, and that is one reason why we are seeing so much economic pessimism right now.

For example, according to a new Rasmussen poll only 14 percent of all Americans believe that children in America today will be “better off” than their parents.

That is an absolutely stunning figure, but it just shows us where we are at.

Our economy has been in decline for a long time, and now we are rapidly approaching another major downturn.

You better buckle up, because this downturn is not going to be pleasant at all.

We Are Watching The Greek Banking System Die Right In Front Of Our Eyes

May 17, 2012May 16, 2012 by Michael

Money is being pulled out of Greek banks at an alarming rate, and if something dramatic is not done quickly Greek banks are going to start dropping like flies. As I detailed yesterday, people do not want to be stuck with euros in Greek banks when Greece leaves the euro and converts back to the drachma. The fear is that all existing euros in Greek banks would be converted over to drachmas which would then rapidly lose value after the transition. So right now euros are being pulled out of Greek banks at a staggering pace. According to MSNBC, Greeks withdrew $894 million from Greek banks on Monday alone and a similar amount was withdrawn on Tuesday. But this is just an acceleration of a trend that has been going on for a couple of years. It has been reported that approximately a third of all Greek bank deposits were withdrawn between January 2010 and March 2012. So where has all of the cash for these withdrawals been coming from? Well, the European Central Bank has been providing liquidity for Greek banks, but now it has been reported that the ECB is going to stop providing liquidity to some Greek banks. It was not announced which Greek banks are being cut off. For now, the Greek Central Bank will continue to provide euros to those banks, but the Greek Central Bank will not be able to funnel euros into insolvent banks indefinitely.

This is a major move by the European Central Bank, and it is going to shake confidence in the Greek banking system even more.

There are already rumors that the Greek government is considering placing limits on bank withdrawals, and many Greeks will be tempted to go grab their money while they still can.

Once strict currency controls are put in place, the population is likely to respond very angrily. If people can’t get their money there is no telling what they might do.

We are reaching a critical moment. Many fear that a full-blown “bank panic” could happen at any time. The following is from a recent Forbes article….

The pressing problem isn’t a splintered legislature that may balk at delivering the reforms that the IMF and European Community are demanding in exchange for the next tranche of bailout money. It’s a disastrous, old-fashioned run-on-the bank. “For a year, Greeks have been sending their savings from Greek banks to foreign banks,” says Robert Aliber, retired professor of international economics from the University of Chicago. “Now, the flood has reached a crescendo.” Indeed on Monday alone, outflows from the Greek banks reached almost $900 million.

These banks would have collapsed already if not for the support of the European Central Bank and the Greek Central Bank. This was described in a recent blog post by Paul Krugman of the New York Times….

But where are the euros coming from? Basically, banks are borrowing them from the Greek central bank, which in turn must borrow them from the European Central Bank. The question then becomes how far the ECB is willing to go here; is it willing, in effect, to lend enough money to buy up the entire balance sheet of the Greek banking sector, given the likelihood that this sector will be left insolvent by Greek default?

Yet if the ECB says no more, Greek banks stop operating — and it’s hard to see how they can be restored to operation except by ditching the euro and using something else.

That is why the announcement that the ECB is cutting off funding was so dramatic. The ECB is starting to pull back and that is a very bad sign for the Greek banking system.

For the moment, the Greek Central Bank is continuing to support the Greek banks that the European Central Bank is no longer providing liquidity for. A Reuters article explained how this works….

The ECB only conducts its refinancing operations with solvent banks. Banks which fail to meet strict ECB rules but are deemed solvent by the national central bank (NCB) concerned can nonetheless go to their NCB for emergency liquidity assistance (ELA).

But this emergency liquidity assistance is not intended to be a long-term solution as a recent Wall Street Journal article noted….

The ECB’s emergency-lending facility isn’t intended as a long-term fix. National central banks must get approval each month that they want to let their banks access the facility from the ECB’s governing council, which can veto use of the program.

If Greece installs an antibailout government that reneges on its austerity promises, it would almost certainly be cut off from ECB funding.

The truth is that we are heading for a financial tragedy in Greece. If the flow of money out of Greek banks intensifies, the Greek banking system might not even be able to make it to the next election in June. This point was underscored in an article that was authored by renowned financial journalist Ambrose Evans-Pritchard….

Steen Jakobsen from Danske Bank said outflows are becoming unstoppable, not helped by open talk in EU circles of `technical’ plans for Greek withdrawal.

“This has a self-fulfilling prophecy built into it and I don’t think we can get to June. The fuse is burning and the only two options now are a controlled explosion where Germany steps in to ensure an orderly exit, or an uncontrolled explosion,” he said.

So what should we expect to see next?

Well, James Carney of CNBC says that he believes that it is inevitable that Greece is going to have to implement currency controls in order to slow the bleeding….

It looks increasingly likely that Greece will have to implement controls to prevent capital flight and a banking collapse. To my mind, the only real question is when this will occur.

The widespread talk about Greece possibly leaving the euro zone is likely to trigger withdrawal of bank deposits and other financial assets, by those who fear they might be redenominated into a drachma that would be worth far less than the euro.

The Greek government may soon announce a limit on the amount of money that can be withdrawn on a single day.

The Greek government may also soon announce a limit on the amount of money that can be moved out of the country.

Those would be dramatic steps to take, but if nothing is done we are likely to watch the Greek banking system die right in front of our eyes.

A Greek exit from the euro seems more likely with each passing day. Such an exit would have a devastating impact on the Greek economy, but it would also dramatically affect the rest of the globe as well. The following is from a recent article by Louise Armitstead….

The Institute of International Finance has estimated that the global cost of a Greek exit could hit €1trillion. When Argentina defaulted in 2001, foreign debtors lost around 70pc of their investments.

That is a big hit for such a little country.

So what would it cost the globe if Spain or Italy left the eurozone?

That is something to think about.

Meanwhile, the United States continues to steamroll down the same road that Greece has gone. According to the Republican Senate Budget Committee, the U.S. government is currently spending more money per person than Greece, Portugal, Italy or Spain does.

We are spending ourselves into oblivion, and we are heading for a national financial disaster.

Unfortunately, most Americans are totally oblivious to all of this.

Instead of getting educated about the horrific financial crisis heading our way, most Americans would rather read about why Jennifer Lopez is leaving American Idol.

But those that are listening to the warnings will be prepared when the storm hits.

Things in Europe look really, really bad.

You better get prepared while you still can.

Why A Greek Exit From The Euro Would Mean The End Of The Eurozone

May 14, 2012 by Michael

What was considered unthinkable a few months ago has now become probable. All over the globe there are headlines proclaiming that a Greek exit from the euro is now a real possibility. In fact, some of those headlines make it sound like it is practically inevitable. For example, Der Spiegel ran a front page story the other day with the following startling headline: “Acropolis, Adieu! Why Greece must leave the euro”. Many are saying that the euro will be stronger without Greece. They are saying things such as “a chain is only as strong as its weakest link” and they are claiming that financial markets are now far more prepared for a “Grexit” than they would have been two years ago. But the truth is that it really is naive to think that a Greek exit from the euro can be “managed” and that business will go on as usual afterwards. If Greece leaves the euro it will set a very dangerous precedent. The moment Greece exits the euro, investors all over the globe will be asking the following question: “Who is next?” Portugal, Italy and Spain would all see bond yields soar and they would all likely experience runs on their banks. It would only be a matter of time before more eurozone members would leave. In the end, the whole monetary union experiment would crumble.

As I have written about previously, New York Times economist Paul Krugman is wrong about a whole lot of things, but in a blog post the other day he absolutely nailed what is likely to soon unfold in Greece….

1. Greek euro exit, very possibly next month.

2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.

3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.

3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.

4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:

4b. End of the euro.

By itself, Greece cannot crash the eurozone. But the precedent that Greece is about to set could set forth a chain of events that may very well bring about the end of the eurozone.

If one country is allowed to leave the euro, that means that other countries will be allowed to leave the euro as well. This is the kind of uncertainty that drives financial markets crazy.

When the euro was initially created, monetary union was intended to be irreversible. There are no provisions for what happens if a member nation wants to leave the euro. It simply was not even conceived of at the time.

So we are really moving into uncharted territory. A recent Bloomberg article attempted to set forth some of the things that might happen if a Greek exit from the euro becomes a reality….

A Greek departure from the euro could trigger a default-inducing surge in bond yields, capital flight that might spread to other indebted states and a resultant series of bank runs. Although Greece accounts for 2 percent of the euro-area’s economic output, its exit would fragment a system of monetary union designed to be irreversible and might cause investors to raise the threat of withdrawal by other states.

In fact, yields on Spanish debt and Italian debt are already rising rapidly thanks to the bad news out of Greece in recent days.

What makes things worse is that a new government has still not formed in Greece. It looks like new elections may have to be held in June.

Meanwhile, the Greek government is rapidly running out of money. The following is from a Bank of America report that was released a few days ago….

“If no government is in place before June when the next installment (of loan money) from the European Union and International Monetary Fund is due, we estimate that Greece will run out of money sometime between the end of June and beginning of July, at which point a return to the drachma would seem inevitable”

In the recent Greek elections, parties that opposed the bailout agreements picked up huge gains. And opinion polls suggest that they will make even larger gains if another round of elections is held.

The Coalition of the Radical Left, also known as Syriza, surprised everyone by coming in second in the recent elections. Current polling shows that Syriza is likely to come in first if new elections are held.

The leader of Syriza, Alexis Tsipras, is passionately against the bailout agreements. He says that Greece can reject austerity because the rest of Europe will never kick Greece out of the eurozone. Tsipras believes that the rest of Europe must bail out Greece because the consequences of allowing Greece to go bankrupt and fall out of the eurozone would be far too high for the rest of Europe.

A spokesman for Syriza, Yiannis Bournos, recently told the Telegraph the following….

“Mr Schaeuble [Germany’s finance minister] is pretending to be the fearless cowboy on the radio, saying the euro is secure [against a Greek exit]. But there’s no way they will kick us out”

So Greece and Germany are playing a game of chicken.

Who will blink first?

Will either of them blink first?

Syriza is trying to convince the Greek people that they can reject austerity and stay in the euro. Syriza insists that the rest of Europe will provide the money that they need to pay their bills.

And most Greeks do actually want to stay in the euro. One recent poll found that 78.1 percent of all Greeks want Greece to remain in the eurozone.

But a majority of Greeks also do not want anymore austerity.

Unfortunately, it is not realistic for them to assume that they can have their cake and eat it too. If Greece does not continue to move toward a balanced budget, they will lose their aid money.

And if Greece loses that aid money, the consequences will be dramatic.

Outgoing deputy prime minister of Greece Theodoros Pangalos recently had the following to say about what would happen if Greece doesn’t get the bailout money that it needs….

“We will be in wild bankruptcy, out-of-control bankruptcy. The state will not be able to pay salaries and pensions. This is not recognised by the citizens. We have got until June before we run out of money.”

If Greece gets cut off and runs out of money, it will almost certainly be forced to go back to using the drachma. If that happens there will likely be a “bank holiday”, the borders will be secured to limit capital flight and new currency will be rapidly printed up. It would be a giant mess.

In fact, there are rumblings that the European financial system is already making preparations for all this. For example, a recent Reuters article had the following shock headline: “Banks prepare for the return of the drachma”

But a new drachma would almost certainly crash in value almost immediately as a recent article in the Telegraph described….

Most economists think that a new, free-floating drachma would immediately crash by up to 50 percent against the euro and other currencies, effectively halving the value of everyone’s savings and spelling catastrophe for those on fixed incomes, like pensioners.

A Greek economy that is already experiencing a depression would get even worse. The Greek economy has contracted by 8.5 percent over the past 12 months and the unemployment rate in Greece is up to 21.8 percent. It is hard to imagine what Greece is going to look like if things continue to fall apart.

But the consequences for the rest of Europe (and for the rest of the globe) would be dramatic as well. A Greek exit from the euro could be the next “Lehman Brothers moment” and could plunge the entire global financial system into another major crisis.

Unfortunately, at this point it is hard to imagine a scenario in which the eventual break up of the euro can be avoided.

Germany would have to become willing to bail out the rest of the eurozone indefinitely, and that simply is not going to happen.

So there is a lot of pessimism in the financial world right now. Nobody is quite sure what is going to happen next and the number of short positions is steadily rising as a recent CNN article detailed….

After staying quiet at the start of the year, the bears have come roaring back with a vengeance.

Short interest — a bet on stocks turning lower — topped 13 billion shares on the New York Stock Exchange at the end of last month. That’s up 4% from March and marks the highest level of the year.

If the eurozone is going to survive, Greece must stay a part of it.

Instead of removing the weakest link from the chain, the reality is that a Greek exit from the euro would end up shattering the chain.

Confidence is a funny thing. It can take decades to build but it can be lost in a single moment.

If Greece leaves the euro, investor confidence in the eurozone will be permanently damaged. And when investors get spooked they don’t behave rationally.

A common currency in Europe is not dead by any means, but this current manifestation is now operating on borrowed time.

As the eurozone crumbles, it is likely that Germany will simply pull the plug at some point and decide to start over.

So what do you think?

Do you think that I am right or do you think that I am wrong?

Please feel free to post a comment with your thoughts below….

Look Out Below – The Nightmarish Decline Of The Euro Has Begun

January 6, 2012January 6, 2012 by Michael

The euro is a dying currency. On Thursday, the EUR/USD fell below 1.28 for the first time since September 2010. In fact, as I write this the EUR/USD is sitting at 1.2791. Back in July, the EUR/USD was over 1.45. But this is just the beginning. The euro is going to go a lot lower. At this point, there are several major European nations that are on the verge of default, the European financial system is overflowing with debt and toxic assets, and most major European banks are leveraged about as badly as Lehman Brothers was when it collapsed. Most Americans simply do not grasp the gravity of what is happening. Just because the Dow is sitting above 12000 and a few U.S. economic numbers have improved slightly does not mean that everything is going to be okay. As I wrote about recently, the EU has a bigger economy than we do and they have a bigger banking system than we do. U.S. banks are massively exposed to European sovereign debt and European banking debt. When the financial system of Europe collapses and the euro falls apart it is going to rock the entire planet. So you better look out below – the euro is coming down and it is coming down hard. After the euro implodes, nothing is every going to be the same again.

So how far are we going to see the euro decline?

Julian Jessop of Capital Economics expects the euro to fall much further….

The relative strength of the recent economic data from the US is supporting the dollar more generally, and we expect this divergence to persist as the euro-zone slides into a deep and prolonged recession. Above all, doubts about the very survival of the euro itself are likely to remain a drag on the currency. We therefore continue to expect the euro to fall to around $1.10 by the end of the year.

Others are even more pessimistic.

As I have written about previously, the head of global bond portfolio management at PIMCO believes that the euro is going to go even lower than that….

“Parity with the dollar next year is not out of the question”

Can you imagine that?

1 dollar = 1 euro?

Don’t think that it can’t happen.

But the decline of the euro is just part of the story. The truth is that Europe is on the verge of a financial collapse that could end up dwarfing the financial crisis of 2008.

Sadly, most Americans have no idea what has been going on in Europe the past few days….

-The stock of the biggest bank in Italy, UniCredit, is absolutely collapsing. Shares of UniCredit fell 14 percent on Wednesday and 17 percent on Thursday.

-Shares of another major Italian bank, Intesa Sanpaolo, fell 7.3 percent on Thursday.

-Shares of three major French banks all fell by at least 5 percent on Thursday.

-Even shares of German banks are falling like a rock. Shares of Commerzbank fell 4.5 percent on Thursday and shares of Deutsche Bank fell 5.6 percent on Thursday.

-The yield on 5 years Italian bonds is back over 6 percent and the yield on 10 year Italian bonds is back over 7 percent. Analysts all over Europe insist that that the Italian debt situation is not sustainable if rates stay this high.

-Italy’s youth unemployment rate has hit the highest level ever.

This is mind blowing news.

But what is the top headline on USA Today right now?

“Employers Impose Bans On Smokers”

These are some of the other top headlines on USA Today right now….

“Automakers Rush To Offer Apps In Your Car”

“Bargain Season At Taco Bell, Pizza Hut, Wendy’s”

“Does Your Dog Understand You? Study Says Maybe”

Is that what passes as news in this country?

A financial meltdown of historic proportions is happening in Europe and you cannot even find anything about it on the front page of USA Today.

Amazing.

All of us need to snap out of our television-induced comas and start waking up.

Things are about to get really bad for the global financial system.

At this point so much confidence has been lost in the euro that even the Council on Foreign Relations is admitting that the euro is a failure….

The euro should now be recognized as an experiment that failed. This failure, which has come after just over a dozen years since the euro was introduced, in 1999, was not an accident or the result of bureaucratic mismanagement but rather the inevitable consequence of imposing a single currency on a very heterogeneous group of countries. The adverse economic consequences of the euro include the sovereign debt crises in several European countries, the fragile condition of major European banks, high levels of unemployment across the eurozone, and the large trade deficits that now plague most eurozone countries.

If even the CFR is throwing in the towel, that should tell you something about what is about to happen to the euro.

There is a very real possibility that we could see the euro break up at some point during the next couple of years.

It now seems that a report produced a while back by Credit Suisse’s Fixed Income Research unit was right on target….

“We seem to have entered the last days of the euro as we currently know it. That doesn’t make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen – probably by mid-January – to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks.”

The European debt crisis just continues to get worse and worse. None of the solutions that European leaders have tried have worked. We are rapidly approaching the meltdown phase of this crisis.

As I have written about previously, it doesn’t take a genius to figure out what is happening in Europe. The equation is simple….

Brutal austerity + toxic levels of government debt + rising bond yields + a lack of confidence in the financial system + banks that are massively overleveraged + a massive credit crunch = A financial implosion of historic proportions

Unfortunately, what is happening right now in Europe is eventually going to happen in the United States as well.

As I wrote about yesterday, U.S. debt is a ticking time bomb that is going to devastate the entire global economy at some point. Nobody knows when the implosion will happen, but everyone knows that it is inevitable.

When Europe falls apart financially, that is going to make our own financial system much less stable. What is happening in Europe could turn our “limited recovery” into a “major recession” almost overnight.

So keep your eye on the euro.

If the euro keeps going down, that is going to be really bad news for the global economy.

Unfortunately, the truth is that the decline of the euro is just getting started.

Hold on to your hats.

***UPDATE***

The euro continues to drop like a rock. Right now it is at 1.2721.

Michael

The Collapse Of The Euro, The Death Of The Euro And The End Of The Euro

December 22, 2011December 15, 2011 by Michael

The euro was a doomed project from the start, and now we are starting to see the endgame play out. Today, the euro fell to an 11-month low against the U.S. dollar. As I write this, the EUR/USD is at 1.2983. Back in July, the EUR/USD was over 1.45. As panic has swept the financial markets, the euro has lost more than 3 percent over the past three days. But this is just the beginning. When the euro drops below 1.20, analysts will talk about the collapse of the euro. When the euro falls toward parity with the dollar, headlines around the world will scream about the death of the euro. But when the European financial system finally collapses, we may very well actually see the end of the euro. Yes, it actually could happen. The eurozone, as it is currently constructed, simply does not work. You just can’t take 17 different nations that have 17 different fiscal policies, 17 different tax policies and 17 different economic agendas and cram them all into a single currency and expect the thing to work. The euro is a doomed currency, and if a big nation like Germany decides to walk away at some point the game is going to be over.

It is not as if the euro is just having a bad week. Just check out this chart that shows what the euro has done relative to the U.S. dollar over the past 6 months.

The truth is that a collapse of the euro has already begun.

And a whole lot of investors expect it to continue. Right now, huge amounts of money are being poured into bets that the euro is going to go even lower.

All over the world, financial professionals are speculating about how far the euro will eventually fall. Scott Mather, the head of global bond portfolio management at PIMCO, says that he believes that the euro is going to go much, much lower….

“Parity with the dollar next year is not out of the question”

Of course the central banks of the world could step in at some point with coordinated action to help support the value of the euro. This kind of thing has happened before. But such support would only be temporary.

Central banks can manipulate the markets for a while, but in the end the long-term trends are going to prevail. Just look at what is happening with European bond yields.

European bond yields are rising once again even though the European Central Bank has already spent over 274 billion dollars buying up European government bonds.

There will be more efforts to try to prevent the death of the euro, but those efforts will be kind of like spitting into the wind.

A recent article posted on Crackerjack Finance talked about some of the fundamental problems that make the euro such a flawed currency….

The problems of the Eurozone’s flawed construct are now completely exposed. A block of 17 sovereign nations have adopted a common currency and outsourced monetary policy to a common central bank. Yet each of the 17 sovereign nations have different comparative advantages, industries, debt levels, interest rates, budget deficits, labor market rules, and tax policies. Reflecting on all the differences, it is amazing that the Eurozone has survived in the current construct for over a decade.

Greece would probably not be going through an economic depression right now if they had not joined the euro. But now, 100,000 businesses have closed since the beginning of the recent crisis and a third of the country is living in poverty.

As this crisis spreads throughout the rest of Europe, it is going to put an incredible amount of stress on the European financial system. Many now believe that the euro may not be able to make it through the tough times that are ahead.

The following comes from a report recently produced by Credit Suisse’s Fixed Income Research unit….

“We seem to have entered the last days of the euro as we currently know it. That doesn’t make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen – probably by mid-January – to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks.”

So will we actually see the end of the euro?

Only time will tell.

But one thing is for sure – the situation in Europe is rapidly getting worse.

In Greece, approximately 20 percent of all bank deposits have been withdrawn since the start of 2011.

If you still have money in a Greek bank, you might want to do something about it before the run on the banks gets even worse.

In fact, if you still have money in any European bank, you might want to consider your options.

Today it was revealed that Germany’s second largest bank is going to need a bailout.

The following comes from a Sky News report….

Germany’s second largest bank, Commerzbank, is reportedly in discussions with the German government about a bailout after regulators said it needed to raise more money to cope with a potential default on its loans to governments.

“Intense talks” have been going on for several days, according to sources who spoke to the news agency Reuters.

Let the bailouts begin!

European governments are going to save the banks that they want to save, and the rest they are going to let fail.

So who will live and who will die?

We just don’t know.

But without a doubt, a whole lot of European banks are in trouble. In fact, Fitch Ratings downgraded the credit ratings of five more major European banks on Wednesday.

The eurozone worked well for a while, but now the flaws in the system are becoming appallingly evident. To get an idea of just how badly the European financial system is unraveling, just check out this chart. European bond yields are not supposed to be acting like that.

In the end, someone is going to leave the euro. There has been a lot of talk about Greece or Italy leaving the euro, but the truth is that it is probably more likely that a strong nation such as Germany will be the first to make a move.

If Germany leaves the euro, will they start printing up new German currency?

No, I believe in that case that Germany would seek to establish an entirely new European currency for an entirely new European financial system. Germany is very committed to the idea of a “European superstate“, and just because the euro is a failure does not mean that they are ready to give up on the idea.

But time will tell who is right and who is wrong.

For much more on why we are on the verge of a massive financial collapse in Europe, please check out these articles….

*”Mega Fail: 17 Signs That The European Financial System Is Heading For An Implosion Of Historic Proportions”

*”22 Reasons Why We Could See An Economic Collapse In Europe In 2012”

As I have written about previously, it doesn’t take a genius to figure out what is happening in Europe. The equation is simple….

Unfortunately, the United States is not going to escape all of this chaos unscathed either.

The financial systems of the United States and Europe are more deeply tied together than ever before. When the financial crisis in Europe fully erupts, we are going to see lots of banks in the United States fail too.

The U.S. economy never recovered from the financial crisis of 2008, and this next financial crisis could send us into a huge tailspin.

2012 is going to be a very interesting year for the financial world. I hope that you all are ready for what is about to happen.

20 Quotes From European Leaders That Prove That They Know That The Financial System In Europe Is Doomed

September 6, 2011September 6, 2011 by Michael

The financial crisis in Europe has become so severe that it has put the future of the euro, and indeed the future of the EU itself, in doubt. If the financial system in Europe collapses, it is going to plunge the entire globe into chaos. The EU has a larger economy and a larger population than the United States does. The EU also has more Fortune 500 companies that the United States does. If the financial system in Europe breaks down, we are all doomed. An economic collapse in Europe would unleash a financial tsunami that would sweep across the globe. As I wrote about yesterday, the nightmarish sovereign debt crisis in Europe could potentially bring about the end of the euro. The future of the monetary union in Europe is being questioned all over the continent. Without massive bailouts, there are at least 5 or 6 nations in Europe that will likely soon default. The political will for continued bailouts is rapidly failing in northern Europe, so something needs to be done quickly to avert disaster. Unfortunately, as anyone that has ever lived in Europe knows, things tend to move very, very slowly in Europe.

If the bailouts end and Europe is not able to come up with another plan before then, mass chaos is going to unleashed. Most major European banks are massively exposed to European sovereign debt, and most of them are also very, very highly leveraged. If we see nations such as Greece, Portugal and Italy start to default, we could have quite a few major European banks go down in rapid succession. That could be the “tipping point” that sets off mass financial panic around the globe.

Of course the governments of Europe would probably step in to bail out many of those banks, but when the U.S. did something similar back in 2008 that didn’t prevent the world from plunging into a horrible worldwide recession.

Right now, the way that the monetary union is structured in Europe simply does not work. Countries that are deep in debt have no flexibility in dealing with those debts, and citizens of wealthy countries such as Germany are becoming deeply resentful that they must keep shoveling money into the financial black holes of southern Europe.

These bailouts cannot go on indefinitely. Political and financial authorities all over Europe know this and they also know that Europe is rapidly heading toward a day of reckoning.

The quotes that you are about to read are absolutely shocking. In Europe they openly admit that the financial system is dying, that the euro is in danger of not surviving and that the EU does not work in its present form.

The following are 20 quotes from European leaders that prove that they know that the financial system in Europe is doomed….

#1 Polish finance minister Jacek Rostowski: “European elites, including German elites, must decide if they want the euro to survive – even at a high price – or not. If not, we should prepare for a controlled dismantling of the currency zone.”

#2 Stephane Deo, Paul Donovan, and Larry Hatheway of Swiss banking giant UBS: “Under the current structure and with the current membership, the euro does not work. Either the current structure will have to change, or the current membership will have to change.”

#3 EU President Herman Van Rompuy: “The euro has never had the infrastructure that it requires.”

#4 German President Christian Wulff: “I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence”

#5 Deutsche Bank CEO Josef Ackerman: “It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels.”

#6 ECB President Jean-Claude Trichet: “We are experiencing very demanding times”

#7 International Monetary Fund Managing Director Christine Lagarde: “Developments this summer have indicated we are in a dangerous new phase”

#8 Prince Hermann Otto zu Solms-Hohensolms-Lich, the Bundestag’s Deputy President: “We must consider whether it would not be better for the currency union and for Greece itself to go for debt restructuring and an exit from the euro”

#9 Alastair Newton, a strategist for Nomura Securities in London: “We believe that we are just about to enter a critical period for the eurozone and that the threat of some sort of break-up between now and year-end is greater than it has been at any time since the start of the crisis”

#10 Former German Chancellor Gerhard Schroeder: “The current crisis makes it relentlessly clear that we cannot have a common currency zone without a common fiscal, economic and social policy”

#11 Bank of England Governor Mervyn King: “Dealing with a banking crisis was difficult enough, but at least there were public-sector balance sheets on to which the problems could be moved. Once you move into sovereign debt, there is no answer; there’s no backstop.”

#12 George Soros: “We are on the verge of an economic collapse which starts, let’s say, in Greece. The financial system remains extremely vulnerable.”

#13 German Chancellor Angela Merkel: “The current crisis facing the euro is the biggest test Europe has faced for decades, even since the Treaty of Rome was signed in 1957.”

#14 Stephane Deo, Paul Donovan, and Larry Hatheway of Swiss banking giant UBS: “Member states would be economically better off if they had never joined. European monetary union was generally mis-sold to the population of the Europe.”

#15 Professor Giacomo Vaciago of Milan’s Catholic University: “It’s clear that the euro has virtually failed over the last ten years, even if you are not supposed to say that.”

#16 EU President Herman Van Rompuy: “We’re in a survival crisis. We all have to work together in order to survive with the euro zone, because if we don’t survive with the euro zone we will not survive with the European Union.”

#17 German Chancellor Angela Merkel: “If the euro fails, then Europe fails.”

#18 Deutsche Bank CEO Josef Ackerman: “All this reminds one of the autumn of 2008”

#19 International Monetary Fund Managing Director Christine Lagarde: “There has been a clear crisis of confidence that has seriously aggravated the situation. Measures need to be taken to ensure that this vicious circle is broken”

#20 German Chancellor Angela Merkel: “The euro is in danger … If we don’t deal with this danger, then the consequences for us in Europe are incalculable.”

Most of the individuals quoted above desperately want to save the euro. They are not going to go down without a fight. The overwhelming consensus among the political and financial elite in Europe is that increased European integration in Europe is the answer.

For example, EU President Herman Van Rompuy is very clear about what he believes the final result of this crisis will be….

“This crisis in the euro zone will strengthen European integration. That is my firm belief.”

Many of the elite in Europe are now openly talking about the need for a “United States of Europe”. Just consider what former German chancellor Gerhard Schroeder recently had to say….

“From the European Commission, we should make a government which would be supervised by the European Parliament. And that means the United States of Europe.”

But as mentioned above, things in Europe tend to move very, very slowly. The debt crisis in Europe is rapidly coming to a breaking point, and it is very doubtful that Europe will be able to move fast enough to head it off.

What we may actually see is at least a partial collapse of the euro and a massive financial crisis in Europe first, and then much deeper European integration being sold by authorities in Europe as “the solution” to the crisis.

This would be yet another example of the classic problem/reaction/solution paradigm.

The “problem” would be a horrible financial crisis and economic downturn in Europe.

The “reaction” would be a cry from the European public for someone to “fix” things and return things back to “normal”.

The “solution” would be a “United States of Europe” with much deeper economic and political integration which is something that many among the political and financial elite of Europe have wanted for a long, long time.

Right now, the people of Europe are very much opposed to deeper economic and political integration. For example, 76 percent of Germans says that they have little or no faith in the euro and one recent poll found that German voters are against the introduction of “Eurobonds” by about a 5 to 1 margin.

It looks like it may take a major crisis in order to get the people of Europe to change their minds.

Unfortunately, it looks like that may be exactly what is going to happen.

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